Client Alert, FTC Issues New Rule Regarding Non-Compete Clauses
On April 23, 2024, the Federal Trade Commission (“FTC”) issued a sweeping rule largely prohibiting the use of non-compete clauses in employment agreements. Non-compete clauses are defined as any term or condition of employment that precludes an employee from seeking or accepting work in the United States after the conclusion of employment, or from operating a business following the conclusion of employment. The rule does not prohibit non-solicitation or confidentiality clauses, provided that such clauses are not so broad as to be the functional equivalent of a non-compete clause.
The rule goes into effect 120 days after its publication in the Federal Register, which should occur soon. The U.S. Chamber of Commerce has already stated it intends to challenge the new rule in court, and other challenges are likely to follow. Therefore, it could be quite some time before the rule becomes effective. Moreover, if Donald J. Trump wins the November 2024 presidential election, it is possible his appointments to the FTC could reverse the rule.
Should the new rule go into effect, however, the rule will have a significant effect on existing and future employment agreements. The rule creates two categories of employees, workers and senior executives. After the effective date of the rule, it will be unlawful for any employer to (i) enter into a non-compete clause with a worker; (ii) enforce or attempt to enforce a non-compete clause against a worker; or (iii) represent that a worker is subject to a non-compete clause. Moreover, any pre-existing non-compete agreements with workers will be invalid.
The rule treats senior executives slightly differently. A senior executive is a worker who: (i) was in a policy-making position (defined as an officer with final authority to make policy decisions that control significant aspects of a business entity or common enterprise); and (ii) received at least $151,164 in total compensation from the employer in the preceding year (subject to annualization if the worker worked only part of the preceding year).
With respect to senior executives, after the effective date of the rule, it will be unlawful for any employer to (i) enter into a non-compete clause with the senior executive; (ii) enforce or attempt to enforce a non-compete clause against the senior executive that was entered into after the effective date of the rule; or (iii) represent that the senior executive is subject to a non-compete clause, if the non-compete clause was entered into after the effective date of the rule.
Thus, if and when the rule goes into effect, employers will be prohibited from entering into new non-compete clauses with their employees. Employers can only enforce pre-existing non-compete clauses against senior executives. All other non-compete clauses are unenforceable.
For all non-compete clauses rendered unenforceable pursuant to this rule, employers must provide clear and conspicuous notice to the worker by the effective date of the new rule that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker.
The new rule does not prohibit non-compete clauses in connection with the sale of a business. The new rule further does not prohibit actions for breach of an existing non-compete clause that accrued prior to the effective date of the new rule.
Please contact Gozdecki, Del Giudice, Americus & Brocato LLP if you have any questions regarding the new rule.
Please note that information contained in this Client Alert is not and should not be construed as legal advice or opinion nor does this Client Alert create an attorney-client relationship.